practice 1. u.s. income increase relative to other countries. does the balance of trade move toward...
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Practice1. U.S. income increase relative to other countries. Does
the balance of trade move toward a deficit or a surplus?- U.S. citizens have more disposable income - Americans import more- Net exports (Xn) decrease- The current account balance decreases and moves
toward a deficit.2. If the U.S. dollar depreciates relative to other
countries does the balance of trade move toward a deficit or a surplus?- US exports are desirable- America exports more- Net exports (Xn) increase- The current account balance decreases and moves
toward a surplus.
Foreign Exchange(aka. FOREX)
Exchange Rate = Relative Price of Currencies
US/China dispute
Exports and Imports1. US sells cars to Mexico2. Mexico buys tractors from Canada3. Canada sells syrup to the U.S.4. Japan buys Fireworks from Mexico For all these transactions, there are different national
currencies.Each country must be paid in their own currencyThe buyer (importer) must exchange their currency
for that of the sellers (exporter).
The turnover in FOREX markets is almost $4 trillion (USD) a day
Currency CodesUSD = US Dollar EUR = Euro JPY = Japanese Yen GBP = British Pound CHF = Swiss Franc CAD = Canadian DollarAUD = Australian Dollar NZD = New Zealand Dollar
Exchange RatesIn the FOREX market we only look at two
countries/currencies at a time Ex: US Dollars and British Pounds
We examine the price of one currency in terms of the other currency. Ex:$2 = £1The Exchange Rate depends on which currency you are converting.The price of one US Dollar in terms of Pounds is
1 Dollar = £1/$2 = £.5The price of one Pound in terms of Dollars is
1 Pound = $2/£1 = $2
What happens if you need more dollar to buy one pound (the price for a pound
increases)? Ex: From $2=£1 to $5=£1
•The U.S. Dollar DEPRECIATES relative to the Pound.
Depreciation
• The loss of value of a country's currency with respect to a foreign currency
• More units of dollars are needed to buy a single unit of the other currency.
• The dollar is said to be “Weaker”
What happens if you need less dollar to buy one pound (the price for a pound
decreases)? Ex: From $2=£1 to $1=£4
•The U.S. Dollar APPRECIATES relative to the Pound.
Appreciation
• The increase of value of a country's currency with respect to a foreign currency
• Less units of dollars are needed to buy a single unit of the other currency.
• The dollar is said to be “Stronger”
S&D for the US DollarsPrice of US
Dollars
Q
Demand by British
Supply by AmericansEquilibrium:
$1 = £1
Quantity of US Dollars
2£/1$
1£/1$
1£/4$
US Dollarappreciates
US Dollardepreciates
Pound£ Dollar$
FOREX Supply and Demand Simplified
Imagine a huge table with all the different currencies from every country
This is the Foreign Exchange Market!Just like at a product market, you can’t take
things without paying.If you demand one currency, you must supply
your currency.Ex: If Canadians what Russian Rubles. The demand for Rubles in the FOREX market will increase and the supply of Canadian Dollars will increase.
FOREX ShiftersLet’s use the example of the US Dollar and the British Pound
1. Changes in Tastes-Ex: British tourists flock to the U.S…
Demand for U.S. dollars increases (shifts right)Supply of British pounds increases (shifts right)
Pound-depreciates Dollar-appreciates
2. Changes in Relative Incomes (Resulting in more imports)-
Ex: US growth increase US incomes….U.S. buys more imports…U.S. Demand for pounds increasesSupply of U.S. dollars increases
Pound- appreciatesDollar- depreciates
3. Changes in Relative Price Level (Resulting in more imports)-
Ex: US prices increase relative to Britain….U.S. demand for cheaper imports increases… U.S. demand for pounds increasesSupply of U.S. dollars increases
Pound- appreciatesDollar- depreciates
4. Changes in relative Interest Rates-Ex: US has a higher interest rate than Britain.
British people want to put money in US banksCapital Flow increase towards the USBritish demand for U.S. dollars increases… British supply more pounds
Pound-depreciatesDollar- appreciates
Video Review Exchange Rates
PracticeFor each of the following examples, identify what will
happen to the value of US Dollars and Japanese Yen. 1. American tourists increase visits to Japan.
2. The US government significantly decreases personal income tax.
3. Inflation in the Japan rises significantly faster than in the US.
4. Japan has a large budget deficit that increases Japanese interest rates.
5. Japan places high tariffs on all US imports.6. The US suffers a larger recession.7. The US Federal Reserve sells bonds at high
interest rates. How do these scenarios affect exports and imports?
PracticeFor each of the following examples, identify what will
happen to the value of US Dollars and Japanese Yen. 1. USD depreciates and Yen appreciates
2. USD depreciates and Yen appreciates 3. USD appreciates and Yen depreciates4. USD depreciates and Yen appreciates5. USD depreciates (Demand Falls) and Yen
appreciates (Supply Falls)6. USD appreciates (Supply Falls) and Yen
depreciates (Demand Falls)7. USD appreciates and Yen depreciatesScenarios 1, 2, and 4 will increase US exports because
US products are now relatively “cheaper”